IMPACT OF AUDITOR’S REPORT ON CORPORATE GOVERNANCE

Abstracts

This project examines the role of auditors report in corporate governance. The problems, challenges, prospects of auditing and corporate governance looked. As a worldwide phenomenon, they have continued to generate divergent views among scholars. The data used comprises of primary data, which consist of self-administered questionnaires and oral interview of some of the respondents. To achieve the purpose of the study, a survey of ten selected companies quoted in the Nigeria to give a true and fair view of companies, It was also discovered that good corporate governance practices builds confidence in investors and encourages stable investment and also auditing and corporate governance are used as a tool of control by management in the achievement of its objectives. It is imperative for Nigeria to adequately address the challenges of these issues for the benefit of the economy.

TABLE OF CONTENTS

Title Page                                                                 i

Certification                                                             ii

Dedication                                                               iii

Acknowledgements                                                  iv

Abstract                                                                   v

Table of Contents                                                     vi

Chapter One: Introduction                                      1

1. Background to the Study                                         1
2. Statement of Problem                                              5
3. Research Questions                                                 6
4. Objectives of the Study                                            6
5. Statement of Hypotheses                                         8
6. Significance of the Study                                         10
7. Scope of the Study                                                   9
8. Limitations of the Study                                         10
9. Definitions of Terms                                                11

Chapter Two: Review of Related Literature              12

1. Introduction                                                             12
2. Theories on Auditing and Corporate Governance     13
3. Historical Framework                                               15
4. The Issue of Corporate Governance in Nigeria         20
5. Corporate Governance and Audit                             23
6. The Mechanisms of Corporate Governance              24
7.  The Roles of the Board of Directors                         28
8. The CEO and Management                                      29
9. Shareholders Rights and Privilege                           29
10. The Role of the Audit Committee                             30
11. The Functions of Audit Committee                          31
12. Auditors and Corporate Governance                                32
13. Origin of Auditor Independence                                       33
14. Definitions of Auditors Independence                      34
15. Importance of Auditor Independence                               35
16. Why External Auditors                                             38
17. Who is an External Auditor                                     38
18. Corporate Governance Challenges in Nigeria           39
19. Impact of Corporate Governance                              40
20. Essence of good Corporate Governance                   40
21. The Link between Corporate Governance

and Investor Confidence                                          42

1.  The Role of those concerned with

Financial Statements                                               43

1. Fundamental Determinants of Equity

Agency Problems                                                      43

1. Perquisite Consumption                                          44
2. Diversification and Wealth                                       45
3. Resistance to Takeovers                                           45
4. Auditing                                                                   46
5. Auditing and Corporate Governance                                53
6. Significance of Auditing to Management
7. Summary                                                                         58

References                                                               61

Chapter Three: Research Method and Design                 72

1. Introduction                                                             72
2. Research Design                                                      72
3. Description of Population of the Study                    73
4. Sample Size                                                             73
5. Sampling Technique                                                        74
6. Sources of Data Collection                                       75
7. Method of Data Presentation                                   76
8. Method of Data Analysis                                          76

Chapter Four: Data Presentation, Analysis

and Interpretation                                                    79

1. Introduction                                                             79
2. Presentation of Data                                                        80
3. Data Analysis
4. Hypothesis Testing                                                  94

Chapter Five: Summary of Findings, Conclusion

and Recommendations                                          109

1. Introduction                                                           109
2. Summary of Findings                                            109
3. Conclusion                                                            113
4. Recommendations                                                 114

Bibliography                                                          117

Appendix                                                                       121

Questionnaires                                                              122

CHAPTER ONE

INTRODUCTION

Background to the Study

Auditing and corporate governance as a good tool or form of control in organizations, are gaining more recognition in Nigeria today, due to the fact that organizations are striving to achieve their vision and mission. The company and Allied Matter Act 1990 (as amended) has made it compulsory for an audit report by an independent auditor to be presented alongside the financial statement of companies which are presented during their Annual General Meetings (AGM).

According to the auditing standards, an audit is an independent examination of and expression of an opinion on the financial statement of an enterprise. It is an examination by an auditor of the evidence from which the final revenue accounts and balance sheet of an organization at the end date, thus enabling the auditor to report thereon.

Where organizations are left audited, it would give rise to indiscipline and non-accordance to standard accounting and auditing practices. Long before the highly publicized corporate scandals and failures worldwide, the Nigerian public has shown increasing concern on the issues of corporate governance, because it has a link to national growth and development.

Corporate governance has been defined as the way and manner in which the affairs of companies are conducted by those charged with the responsibility. It is a system that ensures optimal utilization of resources for the benefits of shareholders while meeting societal expectations. Given the high correlation between corporate governance and investor decisions, the government of Nigerian is keen to position the country to take advantage of the opportunities in the global market by adhering to principle of good governance, thus, Securities and Exchange Commission (SEC) and the Corporate Affairs Commission (CAC) came out with seventeen (17) member committee and drafted the code of best practices for corporate governance in Nigeria.

Depending of the jurisdiction, different bodies may have responsibility of corporate governance, board of Directors, Audit Committee and other supervision committees. International Standards on Auditing (ISA) 260, requires the auditor to determine those persons charged with corporate governance. The most direct of corporate governance is to shareholders. However, the ultimate benefit is the more efficient allocation of capital to its most productive uses. In the real sense, no governance system, no matter how well designed, will fully prevent greedy and dishonest people from putting their personal interests ahead of the interests of the companies they manage. Many steps can be taken to improve corporate governance and thereby reduce opportunities for accounting fraud. This is where the role of auditing (through proper audit reports) comes into play.

The auditor does not has a direct corporate governance responsibility, but rather provides a check on the information aspects of the governance system. The role of auditors in corporate governance involves reporting, decision making, accountability and monitoring. Decision requires relevant and reliable information, accountability involves measuring, reporting and transparency, and monitoring includes system and feedback. Auditor’s primary role is to check whether the financial information given to investors is reliable, i.e. if its expressed the true and image of the organization. The objective of an audit is to express an expert opinion on the fairness with which the financial statement are prepared and presented, in all material aspects a company’s financial position, results of operations, and cash flow in conformity with GAAP to be able to express such an opinion. This must be done using sound auditing techniques.

People rely on financial statements to make economic decision, especially the shareholders, that is, an enterprise outside the organization. With the help of audit work by the external auditor, risk and uncertainty are reduced. Error and fraud can cause irregularity in the case of financial report or statement of any organization. It is the responsibility of the auditor to verify the cause of any irregularity of the auditor to verify the cause of any irregularities in the financial statement. One perception to corporate failures has been to focus on public companies internal controls. Sarbanes-Oxley Act (2002) (SOX) requires a separate report on the effectiveness of internal controls. Recent changes to ISAs place a much higher focus on the auditors understanding internal controls as a part of the audit.

Auditing involves a public responsibility that is more important than the employment relationship with the client. To meet it obligations to shareholders, the board must ensure that it receives relevant and reliable information. The auditor assist the board in achieving those goals. There should be open dialogue between the Auditors and the Board. The auditor must be candid in communicating with the board and its audit committee.

Statement of Problem

Every business organization is set up, to achieve some specific objectives. To achieve such objectives, rules and regulations are laid down even procedures are set out which have to be compiled with. No shareholder or potential investor would like to invest in a business that would not yield returns on investment. There are many factors that could cause lack of returns on investment in an organization. It can be due to improper accounting records, frauds and other internal factors.

Good corporate governance and proper audit report provides for accountability and an input to management information system. Based on the problems stated above, it is very necessary for effective operations and as such, the need for proper audit reporting cannot be overemphasized.

This research intends to examine the role of auditors report in corporate governance in relations to non-financial institution in Nigeria and possibly way forward.

Research Questions

1. Is there any relationship between auditing and corporate governance?
2. Is there any difference between the organization with good corporate governance and the one without good corporate governance?
3. How do we improve the quality of financial quality of auditor’s independence report?
4. How do we ascertain the strength and weaknesses of corporate governance policies in organizations?

Objectives of the Study

There is an increasing incidence of corporate frauds relating to exaggerated or overstated accounts (engineering account). This has informed the need for proper auditing in Nigeria. Investors are ready to pay up to a 20% premium to invest in companies with good corporate governance practices.

The main objectives of this work can be stated as follows:

• To determine if there is a positive relationship between auditing and corporate governance.
• To compare and contrast the difference between the organization with good corporate governance and the one without good corporate governance.
• To ascertain if the auditors independence improves the quality of financial reports or if it affects it.
• To ascertain the strength and weaknesses of corporate governance policies in organizations.

Statement of Research Hypothesis

The following hypothesis will be tested to ascertain their validity using the chi-square analysis.

Hypothesis One

Ho: There is no significant relationship between auditing and corporate governance.

Hi:   There is a significant relationship between auditing and corporate governance.

Hypothesis Two

Ho: There is no significant relationship between organization with good corporate governance and the one without good corporate governance.

Hi:   There is a significant relationship between organization with good corporate governance and the one without good corporate governance.

Hypothesis Three

Ho: There is no significant relationship between the auditors independence and the quality of financial reports of an organization.

Hi:   There is a significant relationship between the auditors independence and the quality of financial reports of an organization.

Hypothesis Four

Ho:  There is no significant relationship between strength and weaknesses and corporate governance policies in organizations.

Hi:   There is a significant relationship between strength and weaknesses and corporate governance policies in organizations.

Scope of the Study

This research will concern itself with the program  and standards of the general auditing practice and procedures and also corporate governance techniques put in place in organizations especially non-financial institutions in Nigeria.

The study will cover public quoted companies in Lagos, Benin, Imo and Delta State. The sampling frame will be constructed from a list of companies obtainable from various sectors of the economy especially non-financial institutions.

Significance of the Study

This research attempts to identify the role of auditors report in corporate governance and the significance or relationship between auditing and corporate governance. This study is aimed at large and medium organization in Nigeria where personal supervision of employees is impossible. The findings in this study will be relevant in taking steps to ensure adherence to corporate governance and auditing provisions. It could also stimulate further research in this field.

Limitations of the Study

It is certain that no research work will be accurately be perfect, and this research work is not exempted. Business and other social science research investigations strive to employ scientific tools and methods. The problems that limit this research investigation are as follows:

1. Inability to obtain sufficient data.
2. Unwillingness of companies to give information and in cases where they do, such information is highly altered.
3. Inability to actually access some organization due to undue rules and regulations.
4. Presentation of incomplete reports by the originations.
5. Weakness occasioned by time and financial constraints.

Definition of Terms

Audit: The evaluation of a system in order to express an option.

Analysis: An examination of something by dividing into separate parts.

Control: A process by which organizations are conformed to a desired plan and such plan conform to organization activities.